Which VG Account for Child to-be?

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TVKNSC
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Which VG Account for Child to-be?

Post by TVKNSC »

My wife and I are expecting our first child in July. I have done some research about UGMA/UTMA/529s and I really want to open a custodial account through VG. I really wish I started investing a little bit earlier than I did so this is my chance to get our child to-be started VERY early in life. The plan is to make a lump-sum investment of $10,000 in a low-fee investment, stay the course, and just let it compound over the years. Obviously we will try to make more contributions as finances allow. I am not overly worried about financing a college education, but more focused on finding a solid investment that fits this situation.

Would a 90% equity/ 10% bond be a safe bet? If so, could it be a life strategy growth fund or 2050 target-date? I realize these balanced funds aren't very tax-efficient. It appears the child must have earned income for an IRA, so taxable account it is? I am also considering how much taxes will effect this decision.

Obviously I am in uncharted waters with having a child, so I am glad I can reach out to this forum for help. I haven't posted here in a while, but read the board all the time. I appreciate any and all advice.
Last edited by TVKNSC on Wed Dec 25, 2013 12:12 pm, edited 1 time in total.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
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cowboy
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Re: Which VG Account for Child to-be?

Post by cowboy »

Congratulations for the great news!

If the money is for college, I think a 529 is your best bet, with you as the account owner. While a 90/10 allocation may be okay initially, the investment horizon is much shorter, so I'd plan to make the allocation substantially more conservative as your child approaches college age. While I am generally not a fan of lifecycle funds for my own investments, I very much do like the glideslope of the the age-based Fidelity index funds through their UNIQUE College Investing Plan (529) -- this is how I am saving for my children's college (with the boost of Fidelity's American Express which automatically adds 2% of my spending to the 529).

I also follow EmergDoc's blog, and he has some great pointers on 529s. Here's a starting point:
http://whitecoatinvestor.com/the-best-5 ... en-better/
sscritic
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Re: Which VG Account for Child to-be?

Post by sscritic »

cowboy wrote: If the money is for college, I think a 529 is your best bet, with you as the account owner.
If you go this way, you might want to wait until after the child is born. You could open it with yourself as the beneficiary now, but then you would have to change beneficiaries later. On the other hand, if your state gives you a deduction for contributions on your state income tax, you may want to open one in the next week.
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cowboy
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Re: Which VG Account for Child to-be?

Post by cowboy »

Thinking more on this question... if your goal is to help your child be financially successful/responsible, my advice would be to lead by example and ensure your own financial house is in order. Your own financial independence is one of the best financial gifts you can give to a child. Case-in-point: my mother-in-law is a "trust fund baby" whose family made a fortune in oil but never passed along the values to protect that wealth. I do value family, but it is a burden knowing that I am going to have to help support an irresponsible parent when I would have much rather utilized my resources helping someone much more deserving, like my children.

Investing time teaching your children to become financially responsible is, methinks, a better investment than you investing money in their names (which will count against them come time for the FAFSA). I found a book in my local library last year which had some fantastic ideas about teaching financial responsibility to your children (it's a quick read, full of gems):
http://www.amazon.com/Making-Allowances ... 071398287/

I started doing an allowance with my then 4 year-old (we have separate share-save-spend piggy banks). What an amazing transformation over the past year! He's been able to learn many math skills, he saves his money to buy his own toys (which he dearly values and respects), and he is very giving -- often using some of his own "spending" money in addition to "sharing" money to help other people/animals. My now 2 year-old watches us do allowance, and he is now so far above his peers with numbers/counting that I think he'll have no difficulty managing an allowance of his own in the near future.

Full disclosure: I started managing my own investments as a pre-teen via a 1:1 matched UGMA account. While it was not a substantial amount of money, it was money that I grew (and it was very disheartening to see that the FAFSA expected me to liquidate its entirety to help fund my education!). My journey on the road to financial success began by following in the footsteps of my financially-responsible role models.
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TVKNSC
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Re: Which VG Account for Child to-be?

Post by TVKNSC »

Cowboy,
Excellent advice, and teaching good financial practices is for sure a goal. I think my main focus is to open an index fund and take advantage of compounding interest over the next 21 years. Age of majority in my state is 21, so the money would be turned over then. In a perfect world, the money that is officially in their control will continue to be invested. So big picture, this money could be invested for 60-70 years. I can see myself sharing the Boglehead philosophy and keep that money invested in the low-cost VG index fund :-).
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
letsgobobby
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Re: Which VG Account for Child to-be?

Post by letsgobobby »

We put non-college money in a Vanguard UTMA/UGMA and invested in a target date fund (2060, I think).
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Re: Which VG Account for Child to-be?

Post by Grt2bOutdoors »

VT - Total World Stock ETF
VTSMX - Total Stock Market Index
and for the really brave - VSMAX - Vanguard Small Cap Index.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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TVKNSC
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Re: Which VG Account for Child to-be?

Post by TVKNSC »

Ok. I never considered a VG ETF, but I will look into it.

I've gathered that the first $950 of earned income from investments in a UGMA is generally tax-exempt. The subsequent income up to $950 is generally taxed at the child’s rate. Any income earned over $1,900 is generally taxed at the parent’s rate. Is this still the case? If so, I really am unsure if average dividends/earnings per year would exceed that, but I suppose the tax consequences still need to be considered.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
Calm Man
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Re: Which VG Account for Child to-be?

Post by Calm Man »

You're joking right? I suggest seeing that the pregnancy goes through to term, the childbirth is successful and the child breathes a few days. You do not need to open an account the nanosecond you have a child.
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TVKNSC
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Re: Which VG Account for Child to-be?

Post by TVKNSC »

Calm,
Of course waiting is the obvious answer, but time does fly and I wanted an idea of what I am looking at. Thanks for your input!?
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
sscritic
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Re: Which VG Account for Child to-be?

Post by sscritic »

TVKNSC wrote: I've gathered that the first $950 of earned income from investments in a UGMA is generally tax-exempt. The subsequent income up to $950 is generally taxed at the child’s rate. Any income earned over $1,900 is generally taxed at the parent’s rate. Is this still the case? If so, I really am unsure if average dividends/earnings per year would exceed that, but I suppose the tax consequences still need to be considered.
That is so last year. $1000 and $2000 (for 2013 and 2014). And it's not tax-exempt. The child has a standard deduction. With $1000 of income of any kind (magazine ads, movies), the $1000 standard deduction will give the child a taxable income of $0.

I lie. If the child earns $1000 by working, the child's standard deduction is $1350.
For purposes of the standard deduction, the amount under §63(c)(5) for an individual who may be claimed as a dependent by another taxpayer cannot exceed the greater of $1,000 OR ($350 + the individual’s earned income).
P.S. income earned from investments is not earned income.
sscritic
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Re: Which VG Account for Child to-be?

Post by sscritic »

Note also: the child is in the 10% bracket with less than $1000 of taxable income, so the tax on that second thousand could be zero if it is qualified dividends and long term capital gains.
Topic Author
TVKNSC
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Re: Which VG Account for Child to-be?

Post by TVKNSC »

Critic,
You've been a great help. Thanks.
“There seems to be some perverse human characteristic that likes to make easy things difficult. ” ― Warren Buffett
sscritic
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Re: Which VG Account for Child to-be?

Post by sscritic »

To get the 0% rate on the second thousand (if qualified dividends and long term capital gains) the child has to file a return (and not use the parents). This uses last year's numbers, but it's the thought that counts:
If your child received qualified dividends or capital gain distributions, you may pay up to $95 more tax if you make this election [Parent's Election To Report Child's Interest and Dividends, Form 8814] instead of filing a separate tax return for the child. This is because the tax rate on the child's income between $950 and $1,900 is 10% if you make this election. However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions.
pub 929
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